Federal Reserve Chair Jerome Powell yesterday offered an explicit endorsement of interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation was within reach of the US central bank’s 2% target.“The upside risks to inflation have diminished. And the downside risks to employment have increased,” Powell said in a highly anticipated speech to the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Referencing the two goals that the Fed is tasked by Congress to achieve, Powell said his “confidence has grown that inflation is on a sustainable path back to 2%,” after rising to about 7% during the Covid-19 pandemic, while unemployment is increasing.
While Powell said the jump of nearly a percentage point in the unemployment rate over the past year was due largely to rising labour supply and slowed hiring, not increased layoffs, he also was emphatic that the Fed wanted to prevent any further erosion — his prior talk of labour market “pain” as necessary to control inflation now a thing of the past. The current unemployment rate of 4.3% is roughly at the level Fed officials feel is consistent with stable inflation over the longer run.
“We do not seek or welcome further cooling in labour market conditions,” Powell said. “We will do everything we can to support a strong labour market as we make further progress towards price stability. With an appropriate dialling back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labour market.” Traders continued to bet on a quarter-percentage-point rate cut at the Fed’s September 17-18 meeting, but after Powell’s remarks priced in about a one-in-three chance of a bigger half-percentage-point cut, up from a little more than a one-in-four probability earlier.
“Powell was clear about the first rate cut, but not so much about the next ones, so I don’t think he’ll be exploding out of the blocks with a 50-basis-point cut,” said Sam Stovall, chief investment strategist at CFRA Research. “I think slow and steady is how the Fed wants to pace this early part of the easing.” Markets are betting the rate cuts will be ongoing, with futures pricing in a Fed policy rate in the 3.00-3.25% range by the end of 2025, down from the current 5.25-5.50% range.Powell’s comments are as close as he is likely to come to declaring victory over the outbreak of inflation that rattled the economy at the start of the pandemic. The fast rise in prices led the Fed to increase its benchmark policy rate from the near-zero level to the current range, which is the highest in a quarter of a century.
It has been held there for more than a year even as the economy defied frequent predictions of recession, inflation fell, and economic growth continued — the makings of a textbook “soft landing,” with the endgame of rate cuts now set to begin.
“While the task is not complete, we have made a good deal of progress” toward restoring price stability, Powell said. The Fed defines price stability as 2% inflation, as measured by the personal consumption expenditures price index. The index is currently running at an annual rate of 2.5%.
Powell spoke at the Jackson Lake Lodge in Wyoming’s Grand Teton National Park to a gathering of central bankers and economists that has become a global platform for officials to shape views of monetary policy and the economy. His comments largely cement a decision the Fed has telegraphed through earlier Powell comments and a readout of the central bank’s July meeting which said a “vast majority” of policymakers agreed rate cuts likely would begin next month.
But his emphatic language has now put beyond doubt that the Fed is opening a new chapter in monetary policy.
As in many of his prior Jackson Hole speeches, much of Powell’s remarks were explanatory in nature, in this case rehashing the combination of supply and demand shocks that caused inflation to rise at the start of the pandemic, why it persisted more than he and other policymakers thought it would, and how the unwinding of those shocks allowed inflation to fall without much initial damage to the job market.